Covid report says Reserve Bank and Treasury could have worked together better

Thursday, 28 November 2024

‘We saw no evidence of the Reserve Bank and the Treasury jointly advising the Government in a coordinated manner,“ commission says.

The Royal Commission into the handling of the Covid pandemic has suggested the Reserve Bank and the Treasury could have worked together better to help manage the economic fall-out from the pandemic.

“The pandemic revealed there is still room to improve mutual understanding and coordination between the Treasury and the Reserve Bank when it comes to using monetary and fiscal policy to best effect in an emergency situation,” it said.

“We also share some concerns that were raised by others about the duration for which the Government and the Reserve Bank provided substantial economic support in the response. This has led to a range of economic pressures that are taking some time to resolve,” it said.

There is a clear demarcation line between the organisations, with the Reserve Bank responsible for monetary policy and the Treasury charged with providing advice to the Government on fiscal matters.

But the Royal Commission noted they were in regular communication and exchanged information to “inform their respective monetary and fiscal policy decisions”.

That continued during the pandemic, but the commission said there was “no active coordination of monetary and fiscal policy in the economic response to the pandemic, in the sense of having a broad common understanding of how they might interact with each other”.

Such an understanding could “matter enormously in a crisis” where matters are evolving fast“, it said.

“We saw no evidence of the Reserve Bank and the Treasury jointly advising the Government in a coordinated manner on the broad pattern of how the quantum and mix of fiscal and monetary stimulus should be provided, and how these should be adjusted as the pandemic evolved.”

The commission also noted that the central bank has been accused of keeping monetary policy too loose too long into the pandemic.

Explainer Editor Lloyd Burr sat down with Royal Commission Chair Tony Blakely ahead of the final report's release. They talked about Voices For Freedom, Jacinda Ardern, and why Winston Peters has beef with him.

The Reserve Bank has previously acknowledged was, in retrospect, an error.

“There was a tendency to hold on to existing public health and indeed other settings for too long. We think this factor also contributed here,” the commission said.

The central bank’s quantitative easing policy, which saw it act to reduce longer-term interest rates by buying back nearly $55b of government bonds, “imposed direct fiscal losses to the taxpayer in the order of $11 billion”, the commission said.

“The jury is still out on how this all played out,” it said.

It noted the Reserve Bank did begin tightening monetary policy from October 2021, “eventually raising the cash rate by a full 525 basis points”.

The Treasury, on several occasions, also reinforced the need for “exit strategies” and recommended some pull-back on fiscal support, it said.

“The Government did respond to these urgings – for example by changing the criteria for the subsequent rounds of the Wage Subsidy Scheme – but the overall picture was one of being cautious about change for too long,” it reported.

The Treasury and the Reserve Bank had a long-established history of sharing information while ensuring they protected the Reserve Bank’s independent operation of monetary policy and the Treasury’s own role of providing independent fiscal and macroeconomic advice, it said.

“We think this is entirely appropriate recognising that collaboration of this sort does not – and should not – blur respective accountabilities,” it said.

“Nevertheless, some gaps in the Treasury and Reserve Bank coordination in an emergency were revealed, despite the fact that it was good by international standards,” it said.